AMD earnings: Are data center owners ‘digesting’ or just not buying Intel chips?


Advanced Micro Devices Inc. earnings will serve as an indication if the data-center market is truly in a “digestion” phase, as Intel Corp. reported.

AMD
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+3.20%

is scheduled to report its first-quarter earnings on Tuesday after the close of markets. When Intel
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reported results last week, the market-share leader noted that the market was just bottoming from a “digestion phase” as its data-center sales dropped 20% year-over-year.

Analysts questioned that characterization of a “digestion phase,” however, asking instead if AMD was taking share away from Intel. Without naming names, Intel shot a salvo over the bows of both AMD and Nvidia Corp.
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+1.39%

when it came to the competitive data-center market with Intel CEO Pat Gelsinger vowing to “fight for every socket in the market.”

Wall Street, on average, expects AMD to report $1.3 billion in enterprise, embedded, and semi-custom sales, the segment containing data-center and gaming-console chips, nearly quadruple the $348 million the company reported in the year-ago period. The low year-ago revenue were attributed to weak console sales with new generation consoles on the horizon, but AMD does not break out data-center sales from gaming sales.

This all comes amid a continuing shortage of microchips to sate demand from global industries, and the companies that make the silicon wafers chip designs use, work to clear waiting lists that span several months.

Read: The semiconductor shortage is here to stay, but it will affect chip companies differently

AMD said in its last earnings report that it expected data-center and gaming sales growth to continue well into 2021. AMD is forecast to report $1.89 billion in computing and graphics sales, a relatively modest 31% rise from a year ago.

In early April, shareholders from AMD and Xilinx Inc.
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approved a $35 billion wrap-up between the two companies. In March, the company announced a new gaming card.

What to expect

Earnings: Of the 34 analysts surveyed by FactSet, AMD on average is expected to post adjusted earnings of 44 cents a share, up from 35 cents a share expected at the beginning of the quarter and 18 cents a share reported in the year-ago period. Estimize, a software platform that crowdsources estimates from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 48 cents a share.

Revenue: Back in January, AMD predicted first-quarter sales between $3.1 billion and $3.3 billion, while analysts on average had forecast revenue of $2.68 billion at the time. Now, 31 analysts, on average, expect revenue of $3.18 billion, up from the $1.79 billion reported in the year-ago quarter. Estimize expects revenue of $3.25 billion.

Stock movement: In the first quarter, AMD shares fell 14.4%. In contrast, the PHLX Semiconductor Index
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gained 11.8%, the S&P 500 index
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gained 5.8%, and the tech-heavy Nasdaq Composite Index
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rose 2.8%.

What analysts are saying

Susquehanna Financial analyst Christopher Rolland, who has a positive rating and a $115 price target on AMD, said PC and graphics processing unit checks point to continued strong demand in the first quarter.

“While many believe upside is capped by capacity constraints, we believe AMD is quickly becoming [Taiwan Semiconductor Manufacturing Co.’s
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+2.43%

] preferred ‘CPU’ partner, as Intel’s IDM 2.0 strategy appears increasingly competitive to the foundry,” Rolland said. “Therefore, we would not be surprised to see AMD receive more than enough wafers to track toward full-year guidance and perhaps beyond.”

Morgan Stanley analyst Joseph Moore, who just reinstated estimates for AMD, said he expects strong earnings above the consensus from AMD with “strong demand across the board, and supply constraints due to substrates and to a lesser extent wafers.”

Moore expects fab priority to keep going to high margin products like servers and “enthusiast desktop microprocessors” and “lowest-margin customers that are strategic and sole sourced” like Microsoft Corp.’s
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and Sony Group Corp.’s
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gaming consoles.

“With competitors also dealing with supply constraints, overall pricing should be healthy,” Moore said. The analysts expects AMD fiscal earnings of $2.04 a share in 2021, $2.59 a share in 2022, and $2.90 a share in 2023, while analysts surveyed by FactSet expect per-share earnings of $1.95, $2.51, and $3.23, respectively.

B of A Securities analyst Vivek Arya, who has a $100 price target, said of the larger chip market that “Supply constraints could limit Q1 outperformance/Q2 outlook, but extend cycle into CY22”

For AMD, “can it obtain enough incremental supply from TSMC to beat its already robust 37% YoY sales outlook for CY21 while firmly convincing investors around INTC share gains?”

Of the 36 analysts who cover AMD, 21 have buy or overweight ratings, 12 have hold ratings and three have sell ratings, with an average price target of $100.50.



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